BoE report hints borrowers could cope with rate rise

Stacks of coins with monopoly-style houses on top

In what could seem to many like a dramatic volte face, the Bank of England has hinted in a recent report that it believes mortgage borrowers could cope with an increase in interest rates.

In its fourth and final quarterly bulletin for 2014, released on Monday 8 December, it estimated that just over a tenth of all households (12%) would need to reduce their spending or take another form of action if borrowing costs rose by 2%. If this rate rise were accompanied by a 10% increase in wages, the percentage of affected households would drop to a mere 1.3%.

Writing for the Financial Times, Chris Giles observed that, whilst the report’s findings are broadly similar to those of the final quarterly bulletin of 2013, “the tone of the bank’s analysis… was much more optimistic”.

The report stated:

“Overall, these results do not imply that increases in interest rates from their current historically low level would have unusually large effects on household spending. Taken together, the estimates … imply that a 1 percentage point increase in interest rates could reduce aggregate spending by around 0.5% via a redistribution of income from borrowers to savers … And a 2 percentage point rise in interest rates could reduce spending by around 1% through this channel.”


The Bank of England’s analysis concerned the estimated number of households that would need to take action, rather than the proportion of survey respondents (upon whose responses the estimates are based) who reported that they would choose to take action. The tonal shift from just under a month ago, when the bank suggested that a rate rise could hamper the economic recovery 1, is marked, and suggests that the bank is attempting to reassure borrowers ahead of a change in monetary policy.

The Bank of England Base Rate (BBR), which influences all UK interest rates, has been at an all-time low of 0.5% for over half a decade. Among the factors that influence the bank’s decision to raise it or keep it level are the possible effects on consumer spending; that is, whether a fall in borrowers’ spending will be offset by a rise in savers’ spending.

Read the 2014 Q4 bulletin in full.

References

1. Chu, B. “Interest rate rises could harm growth, says Bank of England”. The Independent. 14 November 2014.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.

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